Prediction markets can yield valuable insight into the dynamics of political campaigns, a conclusion we've drawn from years of intensive study and research. We've even proselytized about the value of these markets, extolling their ability to yield sharper insights than pundits or polls.
But prediction markets are far from perfect. The insights they yield can be muddied by market manipulation. Over recent weeks Barack Obama has opened a healthy lead in the presidential race. And Friday's debate clearly helped his chances — unless you were following along with the share prices on Intrade.com.
Focus group tickers shown on the major cable networks during the debate consistently put Sen. Obama above the line more often than John McCain. Instant polls by CBS and CNN also pointed to an Obama victory, as did subsequent polling by Gallup and Rasmussen. Daily tracking polls have also shifted toward the Illinois senator. Yet during Friday's debate, share prices on the Intrade market initially appeared to favor Sen. McCain. On closer inspection, however, this appears to reflect the influence of some unusual trading activity.
By Sunday night the market had digested these unusual trades, and Sen. Obama was rated three percentage points more likely to win the White House than he was prior to the debate. He has gained an additional five percentage points since Monday afternoon's failed House vote on the Wall Street bailout bill. Over recent weeks we've observed a pattern of large orders for Sen. McCain on Intrade — home of the most-closely watched markets — executed at times when liquidity is particular scarce. These orders have caused markets to shift sharply, often against the broader political narrative.
The odd pattern has given market-watchers a hint that something was awry, a point recently emphasized by Nate Silver, the election analyst behind FiveThirtyEight.com. This unusual trend, which several academics have suggested reflects attempted manipulation, has not let up.